“Corporate Innovation” is an often-maligned buzzword. Raise the topic and you’ll quickly hear a lot of incorrect talk about how “big corporations cannot innovate.” That is a trite banality that fails to grapple with what large corporations do every day as a part of their core business to grow the top line, drive efficiency and create shareholder value.
There is more to innovation than just expanding existing products and services. At The Combine, we believe corporations also routinely develop intellectual property outside of the core business of the organization. Whether it is entirely new services or products that address whole new markets or sectors, or potentially even attack the core business in a new manner that risks significant disruption, large enterprises routinely innovate along these lines.
The challenge is that corporations struggle to monetize the more disruptive forms of innovation. Inventing something interesting is one thing. Bringing it to market without sacrificing the base business is quite another. The innovation to monetization rift has resulted in the rapid growth of “orphan IP” – very attractive concepts that have been developed but for one reason or another end up sitting on a shelf collecting dust in a company’s archives.
Why Corporations Do Not Routinely Monetize Disruptive Innovation
From our perspective, there are three structural reasons that make it difficult for corporations to monetize their disruptive innovation.
First, Corporate Governance, and specifically the imperative to maximize shareholder value often as a component of a value stock with a dividend, creates an entirely appropriate rubric of risk aversion associated with long-term, high-risk, capital-intensive activities that do not directly support the core of the business.
Think from a CFO’s perspective: would you be performing your fiduciary duty if you signed off on extremely risky and capital-intensive investments in non-core innovation?
Or from General Counsel: how comfortable are you with a highly autonomous team that operates faster than the corporate legal and governing policies can respond?
I empathize with and support the CFO and General Counsel. A 100-year old value stock that pays healthy dividends and returns significant value to its shareholders should not convert operating income into highly risky operating expense to support non-core early-phase innovation, especially when the enterprise is not structured to convert that innovation into new businesses.
This is not to suggest that a corporation should not invest in disruptive innovation. The trick here is to take an approach that aligns all of the critical governing players around the same outcome of increased shareholder value.
At The Combine, we suggest that spinning out the innovation into a standalone business, independently managed but majority-owned by the enterprise, will allow the CFO to convert the operating expense into a balance-sheet asset and allow General Counsel to apply startup-appropriate governance over the NewCo while providing a bit of legal distance for the parent enterprise.
Second, Workforce Capability, defined as both the specific skills and capabilities of individual contributors and the overall ethos and culture of an organization, drives a set of behaviors that greatly influence the ability of an organization to capitalize on innovation.
Do the incentives offered to employees drive innovative behavior, the willingness to take enough risk to innovate but not so much risk as to endanger profitability? Does the overall culture support a sense of urgency that is required to commercialize innovation in a cash-efficient manner? Both of these questions address subtle but hugely impactful aspects of employee behavior. There is little that a corporation can do to dramatically change either one of these factors without substantially risking the core business, which is why change here is often appropriately cautious and slow.
Furthermore, do your employees have the skills not just to invent a concept, but to deeply and dispassionately analyze its potential value in a manner that supports an investment thesis? It is not sufficient to have technical inventors. Do the technical teams have peer-level, ongoing, team-based relationships with individuals who understand the business side of innovation, how to diligence concepts, build pro-formas, engage with investors, and hire a multi-skilled team to grow the enterprise?
The talent required to profitably manage a business is often more valued at an enterprise level than the technical ability to invent, and so the business talent rarely remains peer-level to the technical teams for long. Think about your organization’s compensation for senior engineers and R&D leaders, managing the cost-center technical aspects of the company. Compare that to the senior business executives running profit-center business units or divisions of the company.
If there is a big difference, it is unlikely that the technical teams have routine access to the business talent required to monetize the innovation they create. This issue is also not prone to rapid adjustment, and may not even be appropriate to change given the nature of the core business. Thus this talent gap remains a structural inhibitor to monetization of intellectual property.
For this reason as well, it is worth considering spinning the innovation out into a standalone business that is capable of building the autonomous, nimble, and multi-functional culture required of a startup without the costs of overcoming enterprise workforce inertia.
Lastly, Organizational Structure is often overlooked as a principal inhibitor to capitalizing on disruptive innovation. A startup, in structural terms, is simply an extremely autonomous team with highly localized decision authority that is (by necessity) aggressively multi-functional. These characteristics are what underpin the nimble nature of a startup to allow rapid pivots, extremely short customer response cycles, and lightning-fast product iterations.
In practice, this structure is often the most difficult characteristic of efficient innovation for a corporation to replicate. Traditional corporate structures built around functional silos, divisions, and/or geographies all limit the ability to form and effectively deploy innovation teams. The matrixed organization, conceptually designed to address this exact issue, has had at best a mixed record when deployed at an enterprise level, and in some cases results in the cure being worse than the disease.
It is possible to overcome these structural issues if you are willing to spend the resources to do so, but the capital required to overcome enterprise structure to commercialize innovation is often what flips the IRR of any specific innovation from investable to not investable.
Once again, we suggest the enterprise consider creating a standalone business around the innovation. Doing so bypasses the organizational structure question entirely, and in many cases allows the enterprise to be exposed to, experiment with, and in general try out interesting organizational philosophies without risking disruption to the core business.
Where to Go From Here
Ignoring the impact that these complex issues of governance, workforce, and structure have on corporate innovation is a recipe for routine frustration. We argue that the best path to monetize elements of your intellectual property portfolio is to spin out your most promising non-core IP into independent businesses.
At The Combine, it is our mission to unlock the value of the innovation that you know you have on the shelf. Schedule a short introductory call. We look forward to hearing from you.